VACATION HOME EXCHANGE HANDBOOK

In response to increased activity in many vacation markets, Asset Preservation has created a brand-new Vacation Home Handbook that covers many tax issues related to the ownership and sale of a vacation or second home. This brochure is very comprehensive, contains hyperlinks to key tax code sections and provides useful guidance to property owners, real estate professionals, closers, attorneys and CPAs in resort communities and vacation home marketplaces throughout the United States.

FIRPTA Withholding Rules

Email this page!

UNDERSTANDING THE REQUIREMENTS AND THE EXCEPTIONS

Congress enacted the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) to impose a tax on foreign persons when they sell a U.S. real property interest. A “foreign person” includes a non-resident alien, foreign partnerships, trusts, estates and corporations which have not elected to be treated as a domestic corporation under IRC §897(i). For U.S. property dispositions subject to FIRPTA, the transferee (purchaser) is required to withhold and remit to the IRS 15% of the gross sales price to ensure that any taxable gain realized by the seller is actually paid. The withholding rate is computed differently for other foreign entities, such as foreign corporations and trusts, which are required to withhold 35% of the capital gain realized on the sale. The withholding tax rate on a partner’s share of income is 39.6% for non-corporate partners and 35% for corporate partners. For more information on FIRPTA, visit: www.irs.gov and download IRS Publication 515: Withholding of Tax on Nonresident Aliens and Foreign Entities.

Who is a Non-Resident Alien?

A non-U.S. citizen who does not pass the green card test or the substantial presence test is considered a “non-resident alien.” If a non-citizen currently has a green card or has had a green card in the past calendar year, they would pass the green card test and be classified as a resident alien. If the individual has resided in the U.S. for more than 31 days in the current year and has resided in the U.S. for more than 183 days over a three-year period, including the current year, they would pass the substantial presence test and be classified as a resident alien. For more on the definition of a non-resident alien, see Topic 851, Resident and Non-Resident Aliens.

THREE EXCEPTIONS TO FIRPTA

Property to become buyer’s personal residence. Section 1445 (b)(5) provides an exemption for property acquired by a transferee that will be used as the transferee’s personal residence. To qualify for the exemption, a closing officer will generally require the transferee to sign an affidavit stating that the amount realized (generally sales price) is not more than $300,000, and that the transferee or a member of their family intend to use the property as a personal residence for at least 50% of the number of days the property is used by any person during each of the first two 12-month periods following the date of transfer.

Seller declaration of non-recognition of gain or loss. The second exception to the FIRPTA withholding requirements is the simultaneous 1031 exchange. The transferee is not required to withhold if “[t]he transferor gives written notice that no recognition of any gain or loss on the transfer is required because of a non-recognition provision in the Internal Revenue Code or a provision in a U.S. tax treaty.” Such notice is called a “Declaration and Notice to Complete an Exchange” (1031 Declaration and Notice). A transferee can rely on a 1031 Declaration and Notice only if: (1) the foreign person completes a simultaneous exchange (i.e., the same day); and (2) the foreign person receives no cash or mortgage boot.

Further, if the property was seller’s principal residence, where the sale of property exceeds $300,000, a foreign seller’s notice of non-recognition of gain based on Section 121 may not be relied upon and an IRS withholding certificate is required even though the exclusion may reduce or even eliminate the amount to be withheld under Section 1445.

The third exception is for transactions in which the IRS has issued a withholding certificate (Withholding Certificate) to the foreign seller. The amount which must be withheld by a buyer can be reduced or eliminated pursuant to the Withholding Certificate. The transferee, the transferee’s agent or the transferor may request a Withholding Certificate. The IRS will generally grant or deny an application for a Withholding Certificate within 90 days after its receipt of a completed IRS Form 8288-B application.

IMPACT ON SIMULTANEOUS EXCHANGES

Under the foregoing rules, a buyer of U.S. property from a foreign person can rely on a 1031 Declaration and Notice only if the foreign person exchanges U.S. property for other U.S. property in a swap in which the foreign person receives no cash or mortgage boot. Since many exchanges can involve payment of some cash or debt reduction, the utility of a 1031 Withholding Certificate is substantially reduced.

IMPACT ON DELAYED EXCHANGES

To the extent that the 1031 exchange is not simultaneous, or if any cash or mortgage boot will be received by a foreign person with respect to the disposition of U.S. property, the buyer can only rely on a Withholding Certificate issued by the IRS to a foreign person. As a result, foreign persons desiring to engage in a delayed 1031 exchange should consult with a tax advisor and apply for an International Tax Identification Number (ITIN) and a 1031 Withholding Certificate well in advance of the anticipated disposition of U.S. property holdings. For more information, see ITIN Guidance for Foreign Property Buyers/Sellers.

STEPS INVOLVED IN COMPLYING WITH FIRPTA IN AN EXCHANGE

First, consult with your tax advisor and analyze if FIRPTA applies to you and your transaction and determine if you are considered a “Foreign Person” who is selling a U.S. real property interest.

Notify the buyer of your relinquished property that you have applied for a Withholding Certificate.

Prior to closing on the sale of a relinquished property, contact a qualified intermediary to have the necessary exchange documentation prepared and forwarded to the closing officer so the transaction can be closed as a 1031 exchange.

The exchange begins when the relinquished property closes. The buyer must file IRS Forms 8288 and 8288-A to report and pay the amount withheld to the IRS by the 20th day after the date of the relinquished property closing.

1031 Exchange eNews

We are so thrilled with your assistance with the reverse 1031 exchange. You knew exactly when and how to do each step and how to keep us moving in the right direction. You could explain issues to us that we had difficulty comprehending. We would be delighted to use API again and also recommend the firm to others.

Jill H., Maine

So friendly, personal, efficient and competent (and painless).

Richard G., New York

This is our 4th property exchange with you. Every one of them has been a "10" experience.

Berry, Colorado

One phone call and they took care of everything, no questions - no problems.

Douglas B., Texas

Our exchange paperwork was flawless and always on time. Thank you.

William T., California

Appreciated the instant availability whenever I had a question. Also, greatly appreciated the timely notices and reminders. Thank you for a job well done.

Alice S., Wisconsin

Thank you for the very professional way in which my transactions were handled, making this a pleasant and efficient process. Thanks as well to all your associates who were very gracious to work with.

Lori H., Massachusetts

Your team is great!!! You guys deliver on what you promote when talking about the company at industry events – Thank you!

A.L., Los Angeles

We greatly appreciate the business we do with you and Asset Preservation and your consummate professionalism. No doubt we look forward to doing a lot more business together!

Andy S., New Jersey

I wanted you both to know how much I appreciate you both and all the hard work you do for me and my clients. The reason I recommend you to all my clients is because you are NOTHING SHY OF AWESOME!

Sandy R., California

Thank you for your assistance. You made my client a very happy woman.

Cristopher C., New York

You just helped me obtain a new customer! Looking forward to working with you on this one. Thanks again!

Bill K., Texas

Excellent service. Responsive, professional, and easy to do business with. Everyone I worked with was excellent!

Ferol L., San Diego

Thank you for always being responsive and prompt to my needs.

Anthony C., New York

Thank you so much. You helped make a difficult and complicated situation a pleasure, thank you!

Sandra C., California

I had such efficient people handling the paperwork and walking me through this 1031 process. I would definitely consider doing it again.

Pat H., California

We appreciate everyone's efforts and diligence. The coaching to avoid boot was awesome. Great service!

Allison L., Santa Monica

This is my second 1031 exchange with API and again you hit it out of the park. Thanks for great work.

Beverly W., Colorado

You and your office are also a pleasure to work with. Thank You.

Lisa M., Bronx

I’m not just a client, I’m also a real estate broker. When investor-clients and other real estate professionals ask who I recommend to facilitate a 1031 exchange, I will enthusiastically say – Asset Preservation. Thank you for a wonderful experience!